1.2.5 Income Elasticity Of Demand 💸 Flashcards
What is YED?
Ways to measure responsiveness of demand to a change in consumer income
What are the 3 values you can get for YED?
Negative - inferior products
Positive - normal good 0-1
More than 1? Luxury
What happens to the YED of inferior good if there is a rise in consumer income ?
Decrease in demand and YED for inferior foods
What happenes to the YED of normal goods if consumer income rises ?
Demand rises
What is the YED value for luxury goods ?
More than 1 and positive
What is YED for necessities ?
0-1
What is is the YED for Luxury goods ?
More than 1
How does income grow with luxury income elasticity (YED ) ?
Proportionaly - more it grows the more is spent on luxury products
What happends to nessesites as consumer income rises ?
Less spend less than 1 more than 0
What are the factors influencing income elasticity of demand ?
If it’s a necessity which are basic goods that consumers need to buy
luxuries- goods that consumers come by if they can afford them spending on these goods or discretionary
price of product- high demand for cheap
During a recession wages usually fall and demand for inferior goods rises while demand for luxury goods falls
During a period of economic growth and rising wages, demand for luxury goods increases while demand for inferior goods decreases
Other influences on income include minimum wage legislation, taxation, increased international trade
What are the four significant impacts of income elasticities of demand to a business?
Business selling goods with high income elasticity- Demand of goods are sensitive to changes in income so as the economy of going demand will change causing difficulty
Businesses selling goods with low income elasticities- Demand is less impacted by changing consumer income
tend to be stable during phases of the business cycle so they’ll be no change in demand due to changes in consumer income
Production planning-A business needs to plan how much it is going to produce which will help it determine the number of resources such as raw materials and labour it will need
If a business can determine YED for its products and can accurately predict changes in income then it can plan whether to increase or decrease production
Product switching -
The business goes through different stages- Business Cycle
During a recession producers of inferior goods will benefit from higher demand, but will lose out when incomes rise and consumers return to normal goods
Some businesses might have different products in their product portfolio to take account of this
